Self-professed geeks everywhere admit to an unusual fondness for collectibles. That quirky love propelled Funko sales through the Covid pandemic. And, coming off a year of record financial performance, it helped Funko stock bypass the current stock market downturn. Shares broke out from a valid base pattern on Thursday following an analyst upgrade.
Funko stock bolted nearly 13% higher Thursday, after JPMorgan upgraded its rating to overweight and boosted its price target to $28, from $25.
The Everett, WA-based operation is a massive purveyor of pop culture. It's best known for its Pop! line of collectible figurines. These depict characters ranging from Marvel to Pokemon. Funko has more than 1,000 licensed properties for its lines of action toys, apparel, accessories and games. The company selects "obsession worthy" brands and content, available online and at more than 25,000 retailers.
"The concept behind FNKO's business is simple — everyone is a fan of something, and FNKO sells products that play into that 'fandom', " says Linda Weiser, senior analyst at D.A. Davidson.
A vast library of hundreds of licenses is one of FNKO's key competitive advantages, Weiser says. "The company employs professionals who are truly maniacal about some aspect of pop culture, and that gets translated into the products and the online content they're creating."
Products made by fans, for fans, so far is paying off. Funko generated $1.03 billion in sales in 2021, up 58% year over year, and earnings of $1.42 per share. For 2022, management projects net sales between $1.275 billion and $1.325 billion and EPS to range from $1.80 to $1.90.
Collectible Consumers
The average age of Funko customers is 36, according to the company's 2021 annual presentation. But selling toys to adults has its perks. They're the ones with disposable income for Funko Pop! collectibles, which contribute 75% of the company's revenue.
It also means Funko can capitalize on nostalgia. The company has been increasing its "evergreen" content catalog to include titles like E.T., The Wizard of Oz and The Goonies. In 2021, Funko's nostalgia products earned $688 million in net sales, about 67% of the total. That was up from 43% growth in 2017.
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"FNKO's POP! brand has continued to grow, but the company has also diversified into other categories, like games, where they have introduced many popular titles," Weiser says. "FNKO is also expanding internationally, which has also contributed to the high growth."
Funko's non-figures category has expanded to more than 20% of business, according to its first quarter earnings report. Much of that is due to its June 2017 acquisition of Loungefly, which makes pop culture accessory items like purses, wallets and backpacks.
FNKO's $20 million acquisition saw immediate returns. Loungefly contributed $17 million in sales within six months of the acquisition. Sales increased rapidly to $73 million in 2019, held steady at $85M in 2020, then jumped to $141 million last year. This year, Loungefly netted a quick $50 million in sales in Q1, implying potential sales of $200 million for 2022, Weiser noted.
Global Growth
The company launched its online marketplace for Europe in the fall of 2020. International sales jumped to 28% of Funko's total for 2021. For Q1, U.S. sales surged 70% year over year to $232.2 million. Meanwhile, sales in Europe increased 44% to $57.1 million. Other international sales grew 48% to $19.1 million for the same period.
Beyond selling overseas, Funko has strategically expanded into underpenetrated genres and sought more tactical acquisitions. FNKO broadened its catalog of anime products to capitalize on the genre's global popularity. Its Pop! Albums and Vinyl Gold music lineups released in 2020 and 2021, respectively, feature rock stars and rappers — from Elvis to Tupac. Funko's growing roster of NFL, NBA and other leagues' stars has something for every sports enthusiast.
Mondo Moves
Funko has also entered the market for very expensive collectibles. On June 13, it purchased Mondo for an undisclosed amount. Austin, TX-based Mondo makes high-end vinyls, soundtracks and posters for a variety of movies, shows, comics and video games.
"[The acquisition] could also represent a growth opportunity, if they can grow it like they have done with Loungefly," Weiser says. "FNKO has proven it can be very successful with small acquisitions that it can grow bigger over time, and that could be the case with Mondo, its latest small acquisition."
There's definitely potential to rake in big bucks. Mondo's products sell for theme park prices. Posters can cost as much as $60 and vinyl figures run upward of $120.
Consortium Investment
Funko is also getting some serious interest from investors. On May 5, a consortium led by The Chernin Group Capital Management purchased a 26% stake in Funko for $263 million. They also received two board seats in the deal. Weiser says TCG will help FNKO develop its own intellectual property, something the company has always aspired to do.
Alternate investment sales started booming in popularity during Covid as NFTs, Pokemon and trading cards sold for eye-popping prices. Funko has benefited from the frenzy. Some YouTube creators, like Wasatch Pop or Dr. Applesauce, have dedicated their channels to Funko unboxings and "Grail" hunts, lingo for finding the most exclusive Pops! merchandise. This has led to thousands of subscribers and views for collectible influencers, and contributed to Funko's secondary market.
Ebay was also part of the TCG consortium because of the outlook for continued consumer interest in collectibles, NFTs and trading, Weiser says. Trading, both physical and digital assets, will only get more popular as the online marketplaces develop, she says.
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Going Digital
Funko has been growing its online market for trading and reselling its products, which has further cultivated consumer interest, Weiser says. FNKO began releasing NFT lines last August, and in March it partnered with Warner Bros to add Scooby-Doo and DC characters to its digital licensed properties. This adds another whole layer of pop culture trading, according to Weiser. Sales of Funko's Toy & Game Brands and Digital Brands increased 140% year over year to $18.6 million in Q1. Weiser expects that Funko will begin disclosing its NFT-related numbers once the revenue gets more material.
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"Like all discretionary items, we anticipate demand for collectibles could soften in a recession," Weiser said. "But the modest price points (around $10) for many of FNKO's SKUs make them very affordable."
In its June release, market research analytics firm NPD Group reported that U.S. toy sales only grew 1% through April this year, compared to 28% growth for the first four months of 2021.
"This was on top of unprecedented dollar growth of 28% in the same period last year with two stimulus checks lining the pockets of some consumers," Juli Lennett, U.S. Toy Industry Advisor, said in the report. "The decline in units [down 6%] was not unexpected. The strong increase in average selling prices for the third year in a row was unexpected and drove the growth over last year."
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"Even a consumer recession shouldn't dent FNKO's growth momentum," Weiser noted in recent guidance for the company. "It continues to launch new products, expand its NFT offerings, and gain more distribution abroad." D.A. Davidson reiterated its buy rating for FNKO stock and raised its price target to $50 from $46 in May.
JPMorgan also updated its FNKO forecast on Thursday. Analyst Megan Alexander says Funko is an attractive defensive pick during market volatility. She contends margin pressures will subside as Funko's content cycle picks up, giving upside to the current consensus revenue estimates. Alexander says its efforts to diversify revenue streams should keep FNKO stock resilient.
Technical Analysis Behind The Toys
FNKO stock popped 13% on Thursday following the upgrade and closed at $23.66 . The move propelled FNKO past a 22.29 entry in a six-week cup base. Investors should not be making new purchases while the market status remains in correction.
But if the current rally attempt initiates a confirmed uptrend before Funko's buy range tops out at 23.40, the stock would be a buy. Even if the market does enter a new uptrend, investors should remain cautious when moving capital back into such an uncertain market.
The stock's Relative Strength Rating of 95 is at its highest level since late May. Funko has the highest possible IBD Composite Rating of 99, which combines a number of key technical indicators into one score. Funko also ranks first within its industry group leadership among its toys, games and hobby competitors.
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